If buying a house for investing, wait

There has been a rise in prices, but not enough push is foreseen in the short term. After almost two years, real estate deals have started hitting headlines.

For instance, in the last quarter of the previous financial year, Emaar MGF sold 650 flats, priced at Rs 48-80 lakhs (Rs 4.8-8 million), in its Gurgaon project within a day of launch. 

And, a 3,475-sq ft flat in Samudra Mahal, Mumbai, was yesterday reported to have been sold for over Rs 99,000 a sq ft.

This is primarily because the stock markets have gone nowhere in the past six months.

If one looks at the Bombay Stock Exchange Sensitive Index, the numbers have been range-bound.

The Sensex was at 17,126.84 in September-end; yesterday, it closed at 17,126.84, a rise of 4.75 per cent.

Analysts feel the new interest in the residential property market is mainly because investors are staging a comeback.

"Other than investors, sales in the last six months were to those who upgraded their houses or non-resident Indians making purchases. The interest from first-time buyers is still not prominent enough to support rising sales," said Raja Kaushal, executive director and chief operating officer at BNP Paribas Real Estate Advisory.

Investors are seeing more opportunities in residential property. By contrast, the outlook for commercial property remains bleak due to oversupply. 

Take the example of Mumbai, where eight million sq ft were added in 2009. Another estimated 11 million sq ft would hit the market in 2010. However, 12 per cent of the current supply in the city has still not been absorbed.

The interest in the residential segment has already led to an increase of 15-20 per cent in prices, depending on the location and the city.

But, since buyers who are actual users are still sitting on the fence, experts anticipate a slight correction of around 10 per cent.

"There has been some softening of prices in March and it will continue for some time," said one. The resistance also means one should expect realistic returns before making an investment in property.

"The significant appreciation over the past five-six months was only because the market had bottomed out," said Akshaya Kumar, founder and CEO, Park Lane Property Advisors.

Experts feel that in the coming months, there cannot be any significant price rise because of the cyclical nature of the property business.

Developers sell more than 80 per cent of residential flats between October and March. This is the period when property rates increase.

Also, experts note that interest rates on home loans are rising.

As a result, investors in property are not likely to get great returns in the short term.  Currently, yields on residential real estate can range from as low as 3 per cent to as much as 5 per cent.

This means the investor's annual earning through rent will be much lower than what he can make in a bank fixed deposit.

This earning becomes almost zero if the house has been bought on a loan. Experts, hence, say that one should invest in a property after taking the future appreciation in its value into account, rather than the rent.

"We are advising clients to look at projects cautiously and have a holding period of four-five years," said Kumar.

For those looking to buy a residential unit for investment, experts said it would make sense to wait for another quarter before doing so.

Also, while the prices correct, don't invest with a developer who is just starting out. Rather, look for projects that are at least 50-60 per cent complete.

"Such projects will be 20 per cent cheaper than the existing value in the area and will also have surety of completion," said Anuj Puri, chairman, Jones Lang LaSalle Meghraj.

"Look for opportunities in Tier-I cities only. They have displayed better resurgence in the past three years since the global economic downturn," he added.